foreign direct investment A foreign direct investment (FDI) is an ownership stake in a company, made by a foreign investor, company, or government from another country. More specifically, it describes a controlling ownership an asset in one country by an entity based i ...

(FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a

foreign portfolio investment A foreign portfolio investment is a grouping of assets such as stocks, bonds, and cash equivalents. Portfolio investments are held directly by an investor or managed by financial professionals. In economics, foreign portfolio investment is the entr ...

by a notion of direct control. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans". FDI is the sum of

equity capital In finance, equity is an ownership interest in property that may be subject to debts or other liabilities. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets owned. For example, if someone owns a ...

, long-term capital, and short-term capital as shown in the

balance of payments In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a ...

. FDI usually involves participation in management,

joint-venture A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to acces ...

transfer of technology Technology transfer (TT), also called transfer of technology (TOT), is the process of transferring (disseminating) technology from the person or organization that owns or holds it to another person or organization, in an attempt to transform invent ...

and expertise. ''Stock'' of FDI is the ''net'' (i.e., outward FDI minus inward FDI) cumulative FDI for any given period. Direct investment excludes investment through purchase of shares (if that purchase results in an investor controlling less than 10% of the shares of the company). Foreign direct investment in India is a major monetary source for

economic development in India The economic development in India followed socialist-inspired politicians for most of its independent history, including state-ownership of many sectors; India's per capita income increased at only around 1% annualised rate in the three decad ...

. Foreign companies invest directly in fast growing private auspicious businesses to take benefits of cheaper wages and changing business environment of India.

Economic liberalisation Economic liberalization, or economic liberalisation, is the lessening of government regulations and restrictions in an economy in exchange for greater participation by private entities. In politics, the doctrine is associated with classical liber ...

started in India in wake of the 1991 economic crisis and since then FDI has steadily increased in India, which subsequently generated more than one crore (10 million) jobs. On 17 April 2020, India changed its

(FDI) policy to protect Indian companies from "opportunistic takeovers/acquisitions of Indian companies due to the current

COVID-19 pandemic The COVID-19 pandemic (also known as the coronavirus pandemic and COVID pandemic), caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), began with an disease outbreak, outbreak of COVID-19 in Wuhan, China, in December ...

", according to the

Department for Promotion of Industry and Internal Trade The Department for Promotion of Industry and Internal Trade (DPIIT) is a central government department under the Ministry of Commerce and Industry in India. It is responsible for formulation and implementation of promotional and developmental me ...

. While the new FDI policy does not restrict markets, the policy ensures that all FDI will now be under scrutiny of the

Ministry of Commerce and Industry A ministry of trade and industry, ministry of commerce, ministry of commerce and industry or variations is a ministry that is concerned with a nation's trade, industry and commerce. Notable examples are: List *Algeria: Ministry of Industry and ...

Types

There are mainly two types of FDI—Horizontal and Vertical. However, two other types of FDI have emerged—Conglomerate and Platform FDI. # Horizontal: Under this type of FDI, a business expands its inland operation to another country. The business undertake the same activities but in foreign country. # Vertical: In this case, a business expands into another country by moving to a different level of supply chain. Thus business undertakes different activities overseas but these activities are related to main business. # Conglomerate: Under this type of FDI, a business undertakes unrelated business activities in a foreign country. this type is uncommon as it involves the difficulty of penetrating a new country and an entirely new market. # Platform: Here, a business expands into another country but the output from the business is then exported to a third country.

Routes

There are two routes by which India gets FDI. # Automatic route: By this route FDI is allowed without prior approval by Government or

Reserve Bank of India Reserve Bank of India, abbreviated as RBI, is the central bank of the Republic of India, and regulatory body responsible for regulation of the Indian banking system and Indian rupee, Indian currency. Owned by the Ministry of Finance (India), Min ...

. # Government route: Prior approval by government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate single window clearance of FDI application under Approval Route. The application will be forwarded to the respective ministries which will act on the application as per the standard operating procedure.

Foreign Investment Promotion Board The Foreign Investment Promotion Board (FIPB) was a national agency of Government of India, with the remit to consider and recommend foreign direct investment (FDI) which does not come under the automatic route. India attract net inward foreign ...

(FIPB) which was the responsible agency to oversee this route was abolished on May 24, 2017. It held its last meeting on 17 April, which was the 245th meeting of the Board. On 24 May 2017,

was scrapped by the Union Government.Henceforth, the work relating to processing of applications for FDI and approval of the Government thereon under the extant FDI Policy and FEMA, shall now be handled by the concerned Ministries/Departments in consultation with the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce, which will also issue the Standard Operating Procedure (SOP) for processing of applications and decision of the Government under the extant FDI policy

Recipients

The World Investment Report 2020 by the UN Conference on Trade and Development (UNCTAD) said that India was the 9th largest recipient of FDI in 2019, with $51 billion of inflow during the year, an increase from $42 billion of FDI received in 2018, when India ranked 12 among the top 20 host economies in the world. In the " Development Asia" region, India was among top 5 host economies for FDI. The report said that global FDI flows are forecast to decrease by up to 40% in 2020, from their 2019 value of US$1.54 trillon. According to Financial Times, in 2015 India overtook China and United States as the top destination for the FDI. In first half of 2015 India attracted investment of $31 billion compared to $28 billion and $27 billion of China and US respectively. Data for 2019–2020 indicates that services sector attracted the highest FDI equity inflow of US$7.85 billion, followed by computer software and hardware at US$7.67 billion, telecommunications sector at US$4.44 billion, and trading at US$4.57 billion.

Government initiatives

The

Government of India The Government of India (ISO 15919, ISO: Bhārata Sarakāra, legally the Union Government or Union of India or the Central Government) is the national authority of the Republic of India, located in South Asia, consisting of States and union t ...

has amended FDI policy to increase FDI inflow. In 2014, the government increased foreign investment upper limit from 26% to 49% in insurance sector. It also launched

Make in India is an initiative by the Government of India to create and encourage companies to develop, manufacture and assemble products in India and incentivize dedicated investments into manufacturing. The policy approach was to create a conducive envi ...

initiative in September 2014 under which FDI policy for 25 sectors was liberalised further. , FDI inflow in India increased by 48% since the launch of "Make in India" initiative. In May 2020, government increased FDI in defence manufacturing under the automatic route from 49% to 74%. In April 2020, government amended existing consolidated FDI policy for restricting opportunistic takeovers or acquisition of Indian companies from neighbouring nations.In March 2020,government permitted Non Resident Indians (NRIs) to acquire up to 100% stake in Air India India was ranking 15th in the world in 2013 in term of FDI inflow, it rose up to 9th position in 2014 while in 2015 India became top destination for foreign direct investment. The

and Invest India has developed the India Investment Grid (IIG) which provides a pan-India database of projects from Indian promoters for promoting and facilitating foreign investments.

Coronavirus pandemic impact

On 18 April 2020, the government of India passed an order that would protect Indian companies from FDI during the pandemic. All countries sharing a land border with India would now face scrutiny from the Ministry of Commerce and Industry before any FDIs. These changes were incorporated in the Consolidated FDI policy released on 28 October 2020.

Sectors

During 2014–16, India received most of its FDI from

Mauritius Mauritius, officially the Republic of Mauritius, is an island country in the Indian Ocean, about off the southeastern coast of East Africa, east of Madagascar. It includes the main island (also called Mauritius), as well as Rodrigues, Ag ...

, Singapore,

Netherlands , Terminology of the Low Countries, informally Holland, is a country in Northwestern Europe, with Caribbean Netherlands, overseas territories in the Caribbean. It is the largest of the four constituent countries of the Kingdom of the Nether ...

, Japan and the US. On 25 September 2014,

launched

initiative in which policy statement on 25 sectors were released with relaxed norms on each sector. Following are some of major sectors for Foreign Direct Investment.

Infrastructure

10% of India's GDP is based on construction activity. Indian government has invested $1 trillion on infrastructure from 2012 to 2017. 40% of this $1 trillion had to be funded by private sector. 100% FDI under automatic route is permitted in construction sector for cities and townships.

Electronics system design and manufacturing

The Electronics system design and manufacturing (ESDM) sector in India is rapidly growing and India is poised to become a global electronics manufacturing hub in the future with targeted exports of US$180 billion within 2025.

Information technology

FDI in IT sector is one of the biggest in India. Lots of global companies got their R&D offices in India. Bangalore,Pune,Mumbai and Hyderabad are conisderd to be global IT hubs.

Automotive

FDI in automotive sector was increased by 89% between April 2014 to February 2015. India is 7th largest producer of vehicles in the world with 25.5 million vehicles annually. 100% FDI is permitted in this sector via automatic route. Automobiles shares 7% of the India's GDP.

Pharmaceuticals

Indian pharmaceutical market is 3rd largest in terms of volume and 13th largest in terms of value. Indian pharma industry is expected to grow at 20% compound annual growth rate from 2015 to 2020. 74% FDI is permitted in this sector.

Service

FDI in service sector was increased to 46% in 2014–15. It is US$1.88 billion in 2017. Service sector includes

banking A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect ...

outsourcing Outsourcing is a business practice in which companies use external providers to carry out business processes that would otherwise be handled internally. Outsourcing sometimes involves transferring employees and assets from one firm to another ...

, research & development, courier and technology testing. FDI limit in insurance sector was raised from 26% to 49% in 2014. FDI limit in Insurance has been further increased to 74% in 2021.

Railways

100% FDI is allowed under automatic route in most of areas of railway, other than the operations, like High speed train, railway electrification, passenger terminal, mass rapid transport systems etc. Mumbai-Ahemdabad high speed corridor project is single largest railway project in India, other being port rail network, electrification of Indian railways. Foreign investment more than is expected in these projects so far.

Chemicals

Chemical industry in India earned revenue of $155–160 billion in 2013. 100% FDI is allowed in Chemical sector under automatic route. Except Hydrocynic acid, Phosgene, Isocynates and their derivatives, production of all other chemicals is de-licensed in India. India's share in global specialty chemical industry is expected to rise from 2.8% in 2013 to 6–7% in 2023.

Textile

Textile is one major contributor to India's export. Nearly 11% of India's total export is textile. This sector has attracted about $1647 million from April 2000 to May 2015. 100% FDI is allowed under automatic route. During year 2013–14, FDI in textile sector was increased by 91%. Indian textile industry is expected reach up to $141 billion till 2021.

Airlines

Foreigner investment in a scheduled or regional air transport service or domestic scheduled passenger airline is permitted to 100%.

Aerospace

Indian aerospace manufacturing is also growing rapidly and has attracted huge investments. The industry is projected to reach US$70 billion in 2030.

References

Notes

External links

Foreign Investment Facilitation PortalDepartment of Industrial Policy & Promotion
{{Economy of India Investment in India

India India, officially the Republic of India, is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area; the List of countries by population (United Nations), most populous country since ...

Foreign trade of India